S&P Global: oil and gas producers' capex cooldown won't fire up drillers' leverage

Growth in aggregate spending by national oil companies in Gulf Cooperation Council (GCC) countries will slow from 2024 compared to the previous two years, albeit still remain elevated, according to new research by S&P Global Ratings.

The modest growth in capex in addition to recent capacity addition pauses in Saudi Arabia is likely to slow down rig demand, utilisation ratios, average day rates, and the profitability of the regions' drillers, particularly in Saudi Arabia, the agency said.

“We stress-tested the effect of a hypothetical 15%-20% loss of total rig demand in the region on GCC drillers, and we estimate that the debt to EBITDA of rated and publicly listed drillers based in GCC countries could increase by about 1x on average,” S&P Global Ratings credit analyst Rawan Oueidat said. “At this point, we think that drillers' rating headroom could shrink, but we don't expect any short-term rating pressure,” she added.

Saudi Arabian national oil company (NOC) Saudi Aramco recently paused its plan to expand its maximum sustainable oil-production capacity in the country, raising questions about the spending outlook for oil and gas producers in the broader GCC region.

“S&P Global Ratings believes that growth in NOCs' aggregate spending in the GCC region will slow from 2024 compared to 2022, and to a lesser extent 2023. Spending will still be sizable, at around $110billion-$115 billion on average between 2024 and 2026,while capacity expansion plans outside our base case, particularly those for the recently announced North Field West in Qatar, could elevate it further,” the report said.

While noting that the capital expenditure of NOCs in the region could remain elevated owing to capacity expansion plans in Qatar and the United Arab Emirates, the report said that their spending will affect the oilfield service companies along the value chain, especially drillers. The business models and revenue generation of drillers depend on producers’ capex.

“At this point, we think that drillers' rating headroom could shrink, but we don't expect any short-term rating pressure,” the agency said in the report.

On global hydrocarbon prices, the agency said it expected the price range to support the region's oil and gas sector. “We assume that the price of Brent oil will average $85 per barrel (/bbl) for the remainder of 2024, followed by $80/bbl from 2025.Geopolitical tensions, coupled with production constraints by the Organization of the Petroleum Exporting Countries and its allies (OPEC+), should support oil prices. In turn, these prices should boost cash flows for the NOCs in the region,” S&P Global Ratings said.